**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTOND.C.  20549**

**FORM 10-Q**

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarterly period ended March 31,2007**

**Commissionfile number 000-26621**

**NIC INC.**

(Exact name ofregistrant as specified in its charter)

| **Colorado**                                   | ** ** | **52-2077581**       |
|------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of               |       | (I.R.S Employer      |
| incorporation or  organization)                |       | Identification  No.) |
| **10540 South Ridgeview Road  Olathe, Kansas** |       | **66061**            |
| (Address of  principal executive offices)      |       | (Zip Code)           |

 

**(877)234-3468**(Registrant’s telephone number, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  o   Accelerated filer  x   Non-accelerated filer  o

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act).

Yes  o  No x

The number of shares outstanding of the registrant’scommon stock as of April 30, 2007 was 61,759,316.

 

----

**PART I - FINANCIALINFORMATION**

**Item1.    Consolidated Financial Statements**

**NIC INC.CONSOLIDATED BALANCE SHEETS(UNAUDITED)thousands**
| ** **                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                   |       |               |       |                  |       |
| Cash and cash  equivalents                                                                        |       | $                  | 33,083     |                  | $          | 36,745 |   |
| Marketable  securities                                                                            |       | —             |       | 45,008                |       |
| Trade accounts  receivable                                                                        |       | 37,437             |       | 28,729                |       |
| Unbilled  revenues                                                                                |       | 205                |       | 1,069                 |       |
| Deferred income  taxes                                                                            |       | 817                |       | 711                   |       |
| Prepaid expenses  & other current assets                                                      |       | 1,196              |       | 1,645                 |       |
| Total current  assets                                                                             |       | 72,738             |       | 113,907               |       |
| Property and equipment,  net                                                                      |       | 4,324              |       | 3,790                 |       |
| Deferred income taxes                                                                             |       | 21,302             |       | 22,013                |       |
| Other assets                                                                                      |       | 459                |       | 424                   |       |
| Total assets                                                                                      |       | $                  | 98,823     |                  | $          | 140,134 |   |
|                                                                                              |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                              |       |               |       |                  |       |
| Accounts payable                                                                                  |       | $                  | 34,697     |                  | $          | 34,202 |   |
| Accrued expenses                                                                                  |       | 5,970              |       | 5,911                 |       |
| Application  development contracts                                                                |       | 474                |       | 513                   |       |
| Other current  liabilities                                                                        |       | 258                |       | 255                   |       |
| Total current  liabilities                                                                        |       | 41,399             |       | 40,881                |       |
|                                                                                              |       |               |       |                  |       |
| Other long-term  liabilities                                                                      |       | 1,119              |       | —                |       |
| Total  liabilities                                                                                |       | 42,518             |       | 40,881                |       |
|                                                                                              |       |               |       |                  |       |
| Commitments and  contingencies (Notes 2, 4, 5 and 7)                                              |       | —             |       | —                |       |
|                                                                                              |       |               |       |                  |       |
| Shareholders’ equity:                                                                        |       |               |       |                  |       |
| Common stock, no  par, 200,000 shares authorized 61,759 and 61,574 shares issued and  outstanding |       | —             |       | —                |       |
| Additional  paid-in capital                                                                       |       | 164,584            |       | 210,210               |       |
| Accumulated deficit                                                                               |       | (108,111           | )          | (110,789              | )          |
|                                                                                              |       | 56,473             |       | 99,421                |       |
| Less treasury stock                                                                               |       | (168               | )          | (168                  | )          |
| Total  shareholders’ equity                                                                  |       | 56,305             |       | 99,253                |       |
| Total  liabilities and shareholders’ equity                                                  |       | $                  | 98,823     |                  | $          | 140,134 |   |

 

*The accompanying Notes toConsolidated Financial Statements are an integral part of these statements.*

1

----

**NIC INC.CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)thousands except for per share amounts**
| ** **                                                                              | ** ** | **Three-months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Revenues:                                                                               | ** ** | ** **                                  |       | ** ** | ** ** |
| Portal revenues                                                                         |       | $                                           | 19,868     |   | $ | 16,989 |   |
| Software & services revenues                                                        |       | 766                                         |       | (1,241 | ) |
| Total revenues                                                                          |       | 20,634                                      |       | 15,748 |   |
| Operating  expenses:                                                                    |       |                                        |       |   |   |
| Cost of portal revenues, exclusive of depreciation &  amortization                  |       | 10,454                                      |       | 8,277 |   |
| Cost of software & services revenues, exclusive  of depreciation & amortization |       | 470                                         |       | (1,329 | ) |
| Selling & administrative                                                            |       | 5,120                                       |       | 3,428 |   |
| Depreciation & amortization                                                         |       | 536                                         |       | 505 |   |
| Total operating expenses                                                                |       | 16,580                                      |       | 10,881 |   |
| Operating income                                                                        |       | 4,054                                       |       | 4,867 |   |
| Other income  (expense):                                                                |       |                                        |       |   |   |
| Interest income                                                                         |       | 580                                         |       | 380 |   |
| Equity in net loss of affiliates                                                        |       | —                                      |       | (97 | ) |
| Total other income (expense)                                                            |       | 580                                         |       | 283 |   |
| Income before  income taxes                                                             |       | 4,634                                       |       | 5,150 |   |
| Income tax  provision                                                                   |       | 1,888                                       |       | 2,232 |   |
| Net income                                                                              |       | $                                           | 2,746      |   | $ | 2,918 |   |
| Basic net income  per share                                                             |       | $                                           | 0.04       |   | $ | 0.05 |   |
| Diluted net  income per share                                                           |       | $                                           | 0.04       |   | $ | 0.05 |   |
| Weighted average  shares outstanding:                                                   |       |                                        |       |   |   |
| Basic                                                                                   |       | 61,652                                      |       | 61,129 |   |
| Diluted                                                                                 |       | 61,969                                      |       | 61,596 |   |

 

*The accompanying Notes toConsolidated Financial Statements are an integral part of these statements.*

2

----

**NIC INC.CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY(UNAUDITED)thousands**
| ** **                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**  | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| **Balance,  January 1, 2007**                                |       | 61,574                |       | $           | —     |            | $          | 210,210      |       | $          | (110,789   | )          | $          | (168 | ) | $ | 99,253 |   |
| Cumulative  effect of FIN 48 (Note 4)                        |       | —                |       | —      |       | —          |       | (68          | )          | —     |       | (68        | )          |
| Net income                                                   |       | —                |       | —      |       | —          |       | 2,746        |       | —     |       | 2,746      |       |
| Cash dividends  on common stock (Note 3)                |       | —                |       | —      |       | (46,730         | )          | —       |       | —     |       | (46,730    | )          |
| Stock options  exercised                                     |       | 133                   |       | —      |       | 454             |       | —       |       | —     |       | 454        |       |
| Stock-based  compensation                                    |       | —                |       | —      |       | 411             |       | —       |       | —     |       | 411        |       |
| Issuance of  common stock under employee stock purchase plan |       | 52                    |       | —      |       | 239             |       | —       |       | —     |       | 239        |       |
| **Balance, March 31, 2007**                                  |       | 61,759                |       | $           | —     |            | $          | 164,584      |       | $          | (108,111   | )          | $          | (168 | ) | $ | 56,305 |   |

 

*The accompanying Notes toConsolidated Financial Statements are an integral part of these statements.*

3

----

**NIC INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)thousands**
| ** **                                                                                   | ** ** | **Three-months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**          | ** ** |
| ** **                                                                                   | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                       | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                           | 2,746      |   | $ | 2,918 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                        |       |   |   |
| Depreciation & amortization                                                              |       | 536                         |       | 505 |   |
| Stock based compensation expense                                                             |       | 411                         |       | 200 |   |
| Application development contracts                                                            |       | (39                         | )          | (556 | ) |
| Deferred income taxes                                                                        |       | 1,656                       |       | 2,071 |   |
| Equity in net loss of affiliates                                                             |       | —                      |       | 97 |   |
| Changes in operating assets and liabilities:                                                 |       |                        |       |   |   |
| (Increase) in trade accounts receivable                                                      |       | (8,708                      | )          | (4,358 | ) |
| Decrease in unbilled revenues                                                                |       | 864                         |       | 2,029 |   |
| (Increase) decrease in prepaid expenses & other  current assets                          |       | 449                         |       | (113 | ) |
| Decrease in other assets                                                                     |       | —                      |       | 9 |   |
| Increase in accounts payable                                                                 |       | 495                         |       | 7,893 |   |
| Increase (decrease) in accrued expenses                                                      |       | 59                          |       | (1,983 | ) |
| Increase (decrease) in other current liabilities                                             |       | 3                           |       | (141 | ) |
| Net cash  provided by (used in) operating activities                                         |       | (1,528                      | )          | 8,571 |   |
| Cash flows from investing activities:                                                        |       |                        |       |   |   |
| Purchases of property and equipment                                                          |       | (1,046                      | )          | (785 | ) |
| Capitalized internal use software development costs                                          |       | (59                         | )          | (46 | ) |
| Purchases of marketable securities                                                           |       | —                      |       | (5,000 | ) |
| Sales and maturities of marketable securities                                                |       | 45,008                      |       | — |   |
| Net cash provided by (used in) investing activities                                          |       | 43,903                      |       | (5,831 | ) |
| Cash flows from financing activities:                                                        |       |                        |       |   |   |
| Cash dividends on common stock                                                               |       | (46,730                     | )          | — |   |
| Proceeds from sale of treasury stock                                                         |       | —                      |       | 65 |   |
| Proceeds from employee common stock purchases                                                |       | 239                         |       | 157 |   |
| Proceeds from exercise of employee stock options                                             |       | 454                         |       | 307 |   |
| Net cash provided by (used in) financing activities                                          |       | (46,037                     | )          | 529 |   |
| Net increase (decrease) in cash and cash equivalents                                         |       | (3,662                      | )          | 3,269 |   |
| Cash and cash  equivalents, beginning of period                                              |       | 36,745                      |       | 36,902 |   |
|                                                                                         |       |                        |       |   |   |
| Cash and cash  equivalents, end of period                                                    |       | $                           | 33,083     |   | $ | 40,171 |   |
|                                                                                         |       |                        |       |   |   |
| Other cash flow  information:                                                                |       |                        |       |   |   |
|                                                                                         |       |                        |       |   |   |
| Interest paid                                                                                |       | $                           | —     |   | $ | — |   |
| Income taxes paid                                                                            |       | $                           | 263        |   | $ | 363 |   |

 

*The accompanying Notes toConsolidated Financial Statements are an integral part of these statements.*

4

----

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

NIC Inc. (“NIC” or the “Company”)has prepared the consolidated interim financial statements included hereinwithout audit, pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”).  Certaininformation and disclosures normally included in financial statements preparedin accordance with generally accepted accounting principles have been omittedpursuant to such rules and regulations. In management’s opinion, the consolidated interim financial statementsreflect all adjustments (which include only normal recurring adjustments,except as disclosed) necessary to state fairly the results of operations forthe interim periods presented.  Theseconsolidated financial statements and notes should be read in conjunction withthe audited consolidated financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006,filed with the SEC on March 15, 2007, and Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in this Form10-Q.  The consolidated balance sheetdata included herein as of December 31, 2006 was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

**1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

*The Company*

NICInc., formerly National Information Consortium, Inc., is a provider ofeGovernment services that helps governments use the Internet to reduce costsand provide a higher level of service to businesses and citizens.  The Company accomplishes this currentlythrough two divisions: its primary portal outsourcing businesses and itssoftware & services businesses.

Inits primary portal outsourcing business, the Company designs, builds andoperates Internet-based portals on behalf of state and local governmentsdesiring to provide access to government information and to complete government-basedtransactions online.  These portalsconsist of Web sites and applications the Company has built that allowbusinesses and citizens to access government information online and completetransactions, including applying for a permit, retrieving driver’s license recordsor filing a government-mandated form or report. Operating under multiple-year contracts (see Note 2), NIC marketsthe services and solicits users to complete government-based transactionsand to enter into subscriber contracts permitting users to access the portaland the government information contained therein in exchange for transactionaland/or subscription user fees. The Company manages operations for eachcontractual relationship through separate local subsidiaries that operate asdecentralized businesses with a high degree of autonomy.  NIC’s self-funding business model allows theCompany to reduce its government partners’ financial and technology risks andgenerate revenues by sharing in the fees the Company collects from eGovernmenttransactions.  The Company’s governmentpartners benefit through gaining a centralized, customer-focused presence onthe Internet, while businesses and citizens receive a faster, more convenientand more cost-effective means to interact with governments.  The Company is typically responsible forfunding up front investment and ongoing operational costs of the governmentportals.

TheCompany’s software & services businesses primarily include its UniformCommercial Code (“UCC”) and corporate filings software development

5

----

business and its ethics& elections business.  The Company’sUCC and corporate filings software development business, NIC Conquest, is aprovider of software applications and services for electronic filings anddocument management solutions for governments. This business focuses on Secretaries of State, whose offices are stategovernments’ principal agencies for UCC and corporate filings.  Currently, NIC Conquest is primarily engagedin servicing its contract with the California Secretary of State and is notactively marketing its applications and services in respect of newengagements.  The Company’s ethics &elections business, NIC Technologies, designs and develops online campaignexpenditure and ethics compliance systems for federal and state governmentagencies. Currently, NIC Technologies is primarily engaged in servicing itscontracts with the Federal Election Commission and the State of Michigan.

*Basis of presentation*

The Company classifies itsrevenues and cost of revenues into two categories: (1) portal and (2) software& services.  The portal categoryincludes revenues from the Company’s subsidiaries operating government portalsunder long-term contracts on an outsourced basis.  The software & services category includesrevenues primarily from the Company’s software & services businesses.  The primary categories of operating expensesinclude: cost of portal revenues, cost of software & services revenues,selling & administrative, and depreciation & amortization.  Cost of portal revenues consist of all directcosts associated with operating government portals on an outsourced basisincluding employee compensation, telecommunications, credit card merchant fees,and all other costs associated with the provision of dedicated client servicesuch as dedicated facilities.  Cost ofsoftware & services revenues consist of all direct project costs to providesoftware development and services such as employee compensation, subcontractorlabor costs, and all other direct project costs including hardware, software,materials, travel and other out-of-pocket expenses.  Selling & administrative costs consistprimarily of corporate-level expenses relating to human resource management,administration, information technology, legal and finance, and all costs ofnon-customer service personnel from the Company’s software & servicesbusinesses, including information systems and office rent.  Selling & administrative costs alsoconsist of corporate-level expenses for market development and publicrelations.

*Earnings per share*

Basic earnings per share arecalculated on the basis of the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share are calculated on the basis of the weighted average numberof common shares outstanding during the period and common stock equivalentsthat would arise from the exercise of stock options or the issuance ofrestricted stock awards to employees and nonemployee directors using thetreasury stock method.  The followingtable sets forth the computation of basic and diluted earnings per share (inthousands, except per share amounts):

6

----

 

|                                            | ** ** | **Three Months**         | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Ended March 31,** | ** ** |
| ** **                                 | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| **Numerator:**                             |       |                          | ** ** |   |   |
| Net income                                 |       | $                             | 2,746      | ** ** | $ | 2,918 |   |
| **Denominator:**                           |       |                          |       |   |   |
| Weighted average  shares — basic      |       | 61,652                        | ** ** | 61,129 |   |
| Stock options  and restricted stock awards |       | 317                           |       | 467 |   |
| Weighted average  shares — diluted    |       | 61,969                        |       | 61,596 |   |
| **Basic  earnings per share:**             |       |                          |       |   |   |
| Net income                                 |       | $                             | 0.04       |   | $ | 0.05 |   |
| **Diluted  earnings per share:**           |       |                          |       |   |   |
| Net income                                 |       | $                             | 0.04       |   | $ | 0.05 |   |

 

Outstanding stock optionstotaling approximately 0.4 million shares for each of the three-month periodsended March 31, 2007 and 2006 were not included in the computation of dilutedweighted average shares outstanding because their exercise prices were in excessof the average stock price of the Company during the periods.

*Income taxes*

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes —an interpretation of FASB Statement No. 109.” FIN 48 provides a comprehensive model for how a company shouldrecognize, measure, present and disclose in its financial statements uncertaintax positions that the Company has taken or expects to take on its income taxreturns.  FIN 48 defines the thresholdfor recognizing a tax return position in the financial statements as “morelikely than not” that the position is sustainable, based on its technicalmerits.  FIN 48 also provides guidance onthe measurement, classification and disclosure of tax return positions in acompany’s financial statements.  TheCompany adopted the provisions of FIN 48 on January 1, 2007, with thecumulative effect recorded as an adjustment to the opening balance ofaccumulated deficit.  See Note 4for additional discussion of the Company’s adoption of FIN 48.

*Recent accounting pronouncements*

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify the sourceof the information.  The Company will berequired to adopt this standard in the first quarter of 2008.  The Company is currently evaluating therequirements of SFAS No. 157 and has not yet determined the impact, if any, onits consolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value.  Unrealized gains and losses

7

----

on items for whichthe fair value option has been elected are reported in earnings.  SFAS No.159 does not affect any existing accounting literature that requires certainassets and liabilities to be carried at fair value. The Company will berequired to adopt this standard in the first quarter of 2008.  The Company is currently evaluating therequirements of SFAS No. 159 and has not yet determined the impact, if any, onits consolidated financial statements.

**2.OUTSOURCED GOVERNMENT PORTAL CONTRACTS**

The Company’soutsourced government portal contracts generally have an initial term of threeto five years with provisions for renewals for various periods at the option ofthe government.  The Company’s primarybusiness obligation under these contracts is to design, build and operateInternet-based portals on behalf of governments desiring to provideaccess to government information and to complete government-basedtransactions online. NIC typically markets the services and solicits users tocomplete government-based transactions and to enter into subscribercontracts permitting the user to access the portal and the government informationcontained therein in exchange for transactional and/or subscription userfees.  The Company enters into separateagreements with various agencies and divisions of the government to providespecific services and to conduct specific transactions. These agreementspreliminarily establish the pricing of the electronic transactions and dataaccess services the Company provides and the division of revenues between theCompany and the government agency. The government must approve prices andrevenue sharing agreements.

The Company istypically responsible for funding up front investment and ongoing operationalcosts of the government portals, and generally owns all the applicationsdeveloped under these contracts. After completion of a defined contract term,the government agency typically receives a perpetual, royalty-free license tothe applications for use only. If the Company’s contract were not renewed aftera defined term, the government agency would be entitled to take over the portalin place with no future obligation of the Company. 

At March 31, 2007,the Company was bound by performance bond commitments totaling approximately$2.3 million on certain portal outsourcing contracts.  Under a typical portal contract, the Companyis required to fully indemnify its government clients against claims that theCompany’s services infringe upon the intellectual property rights of others andagainst claims arising from the Company’s performance or the performance of theCompany’s subcontractors under the contract.

8

----

 

The following is a summary of the Company’s nineteenoutsourced state government portal contracts at March 31, 2007: 
| **NIC  Subsidiary**              | ** ** | **Portal Web Site (State)**   | ** ** | **Year  Services  Commenced** | ** ** | **Contract Expiration  Date (Renewal  Options Through)** |
|----------------------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------------------------------------------------|
| Vermont Information  Consortium  |       | www.Vermont.gov (Vermont)     |       | 2006                          |       | 10/15/2009 (10/14/2012)                                  |
| Colorado  Interactive            |       | www.Colorado.gov (Colorado)   |       | 2005                          |       | 5/19/2010 (5/19/2014)                                    |
| South Carolina  Interactive      |       | www.SC.gov (South Carolina)   |       | 2005                          |       | 7/15/2007 (7/15/2009)                                    |
| Kentucky Interactive             |       | www.Kentucky.gov (Kentucky)   |       | 2003                          |       | 1/31/2009 (1/31/2013)                                    |
| Alabama  Interactive             |       | www.Alabama.gov (Alabama)     |       | 2002                          |       | 2/28/2008 (2/28/2012)                                    |
| Maine  Information Network       |       | www.RI.gov (Rhode Island)     |       | 2001                          |       | 6/18/2007 (6/18/2011)                                    |
| NICUSA                           |       | www.OK.gov (Oklahoma)         |       | 2001                          |       | 6/30/2007 (6/30/2009)                                    |
| Montana  Interactive             |       | www.MT.gov (Montana)          |       | 2001                          |       | 12/31/2010                                               |
| NICUSA                           |       | www.Tennessee.gov (Tennessee) |       | 2000                          |       | 8/27/2010                                                |
| Hawaii  Information Consortium   |       | www.Hawaii.gov (Hawaii)       |       | 2000                          |       | 1/3/2008                                                 |
| Idaho  Information Consortium    |       | www.Idaho.gov (Idaho)         |       | 2000                          |       | 3/31/2008                                                |
| Utah Interactive                 |       | www.Utah.gov (Utah)           |       | 1999                          |       | 5/6/2009                                                 |
| Maine  Information Network       |       | www.Maine.gov (Maine)         |       | 1999                          |       | 1/14/2008                                                |
| Arkansas  Information Consortium |       | www.Arkansas.gov (Arkansas)   |       | 1997                          |       | 6/30/2008                                                |
| Iowa Interactive                 |       | www.Iowa.gov (Iowa)           |       | 1997                          |       | 3/31/2011 (3/31/2012)                                    |
| Virginia  Interactive            |       | www.Virginia.gov (Virginia)   |       | 1997                          |       | 8/31/2012                                                |
| Indiana  Interactive             |       | www.IN.gov (Indiana)          |       | 1995                          |       | 6/30/2010 (6/30/2014)                                    |
| Nebraska  Interactive            |       | www.Nebraska.gov (Nebraska)   |       | 1995                          |       | 1/31/2009 (1/31/2010)                                    |
| Kansas  Information Consortium   |       | www.Kansas.gov (Kansas)       |       | 1992                          |       | 12/31/2007 (12/31/2009)                                  |

 

In the first quarter of 2007, the Company received a one-year contractextension from the state of Idaho, which extended the contract expiration dateto March 2008, and signed a new one-year contract with the state of Alabama,which includes options to extend the contract for four additional one-yearrenewal terms.

**3. SPECIAL CASH DIVIDEND**

OnJanuary 29, 2007, the Company’s Board of Directors declared a special cashdividend of $0.75 per share, payable to shareholders of record as of February12, 2007.  The dividend, totalingapproximately $46.7 million, was paid on February 20, 2007 on 61,686,425outstanding shares of common stock.  Adividend equivalent of $0.75 per share was also paid simultaneously on 618,038unvested shares of restricted stock granted under the Company’s 2006 StockOption and Incentive Plan.  The dividendwas paid out of the Company’s available cash and marketable securities.

The Company has made a preliminary determination thatthe dividend will result in a partial return of capital to shareholders, withthe balance being taxable to shareholders as a qualified dividend.  The exact amount of the return of capital isdependent on the earnings of the Company, computed on a tax basis, through theend of its 2007 fiscal year.

**4.UNCERTAIN TAX POSITIONS**

The Company, along with itswholly owned subsidiaries, files a consolidated U.S. federal income tax returnand separate income tax returns in many states throughout the U.S.  The Company’s tax returns are not currentlyunder examination by any of these tax authorities.  The Company remains subject to U.S. federal examination for the tax years ended onor after December 31, 2003.** **State income tax returns aregenerally subject to examination for a period of three to five years afterfiling of the respective return.

Asa result of the implementation of FIN 48 (see Note 1), the Company recognized a$68,000 increase in the liability for unrecognized tax benefits,

9

----

 

which resulted in anincrease to the January 1, 2007 accumulated deficit balance of $68,000. As ofJanuary 1, 2007, after the implementation of FIN 48, the Company’s unrecognizedtax benefits were $1,119,000, all of which would affect the Company’s effectivetax rate if recognized.  There have beenno significant changes to this amount during the quarter ended March 31,2007.  It is expected that the amount ofunrecognized tax benefits will change in the next 12 month.  However, the Company does not expect thechange to have a significant impact on its results of operations or financialcondition.

TheCompany recognizes accrued interest and penalties associated with uncertain taxpositions as part of its income tax provision in the consolidated statements ofincome.  At March 31, 2007, accruedinterest and penalty amounts were not material.

**5. CALIFORNIA SECRETARY OF STATE APPLICATIONDEVELOPMENT CONTRACT**

In September 2001,NICUSA, Inc. and the Company’s NIC Conquest subsidiary were awarded a five-year,$25 million contract by the California Secretary of State (the “California SOS”)to develop and implement a comprehensive information management and filingsystem.  The Company recognizes revenuesfrom this contract on the percentage of completion method, utilizing costsincurred to date as compared to the estimated total cost.  Revenues and profit (loss) from this contractare based on the Company’s cost estimates to complete and are reviewedperiodically, with adjustments recorded in the period revisions are made.  Any anticipated contract loss is charged tooperations as soon as determinable.

In March 2006, theCompany and the California SOS entered into an amendment (the “Amendment”) tothe California Business Programs Automation Agreement (the “Agreement”).  Among other changes to the Agreement, theAmendment reduced the aggregate contract value to approximately $19 million andreleased the Company from the obligation to deliver the business filings, orBE, portion of the project, except for maintenance of hardware and delivery ofBE images as expressly set forth in the Amendment.  The Amendment also set forth the finalcriteria in order for the California SOS to accept the UCC portion of theproject and move it into the maintenance and operations phase.

As a result of the Amendment, the Company recorded anadjustment under percentage of completion accounting in the first quarter of2006.  The adjustment in the Company’sconsolidated statement of income for the three-month period ended March 31, 2006resulted in a reduction of software & services revenues of approximately$2.1 million and a reduction of cost of software & services revenues ofapproximately $2.1 million.  Theadjustment in the Company’s consolidated balance sheet was a reduction in unbilledrevenues of approximately $2.1 million, a reduction of accrued liabilities ofapproximately $1.6 million, and a reduction of application developmentcontracts of approximately $0.5 million. This adjustment did not affect operating income, net income or earningsper share.

In June 2006, theCalifornia SOS officially accepted the UCC portion of the project, whichcommenced the 42-month maintenance and operations phase.

The Company regularly reviews its cost estimates tocomplete and does not currently believe its estimated contract loss will exceedthe $4.2 million estimate established in the first quarter of 2005. However,because of the inherent uncertainties surrounding the ultimate outcome ofsubcontract

10

----

negotiationsbetween the Company and its subcontractors as a result of the Amendment, it isat least reasonably possible that the estimate will change in the nearterm.  Further, it is possible that theCompany will similarly incur cost overruns in the future as it has in the pastas a result of unforeseen difficulties such as rising development,subcontractor and personnel costs or other reasons. If this occurs, the Company’sresults of operations, financial condition and cash flows could be adverselyaffected.

For additionaldiscussion of the Company’s contract with the California SOS, refer to Note 2to the consolidated financial statements included in the Company’s Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 15, 2007.

**6. REPORTABLE SEGMENTS AND RELATED INFORMATION**

The Company’s tworeportable segments consist of its Outsourced Portal businesses and Software& Services businesses.  TheOutsourced Portals segment includes the Company’s subsidiaries operatingoutsourced government portals and the corporate divisions that directly supportportal operations.  The Software &Services segment primarily includes the Company’s UCC and corporate filingssoftware development business (NIC Conquest) and ethics & elections filingsbusiness (NIC Technologies).  Each of theCompany’s Software & Services businesses is an operating segment and hasbeen aggregated to form the Software & Services reportable segment.Unallocated corporate-level expenses are reported in the reconciliationof the segment totals to the related consolidated totals as “Other ReconcilingItems.”  There have been no significantintersegment transactions for the periods reported.

The measure ofprofitability by which management evaluates the performance of its segments andallocates resources to them is operating income (loss).   Segment asset or other segment balance sheetinformation is not presented to the Company’s chief operating decisionmaker.  Accordingly, the Company has notpresented information relating to segment assets.

Thetable below reflects summarized financial information concerning the Company’sreportable segments for the three months ended March 31 (in thousands): 
| ** **                       | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2007**                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                         |       | $                       | 19,868     |                          | $          | 766                           |       | $                       | —     |   | $ | 20,634 |   |
|                             | ** ** | ** **              |       |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses            |       | 11,345                  | ** ** | 549                           |       | 4,150                         |       | 16,044                  |       |
| Depreciation  & amortization |       | 498                     | ** ** | 6                             |       | 32                            |       | 536                     |       |
| Operating income  (loss)         |       | $                       | 8,025      | ** **                    | $          | 211                           |       | $                       | (4,182     | ) | $ | 4,054 |   |
|                             | ** ** | ** **              | ** ** |                          |       | ** **                    | ** ** | ** **              | ** ** |
|                             |       |                    |       |                          |       |                          |       |                    |       |
| **2006**                         | ** ** | ** **              | ** ** |                          |       | ** **                    | ** ** | ** **              | ** ** |
| Revenues                         |       | $                       | 16,989     |                          | $          | (1,241                        | )          | $                       | —     |   | $ | 15,748 |   |
|                             | ** ** | ** **              |       |                          |       | ** **                    |       |                    |       |
| Costs &  expenses            |       | 8,946                   | ** ** | (1,003                        | )          | 2,433                         |       | 10,376                  |       |
| Depreciation  & amortization |       | 458                     | ** ** | 20                            |       | 27                            |       | 505                     |       |
| Operating income (loss)          |       | $                       | 7,585      | ** **                    | $          | (258                          | )          | $                       | (2,460     | ) | $ | 4,867 |   |

 

11

----

 

The following is areconciliation of total segment operating income to total consolidated incomebefore income taxes for the three months ended March 31 (in thousands):  
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating  income for reportable segments |       | $        | 4,054      |     | $          | 4,867 |   |
| Interest income                                 |       | 580      |       | 380      |       |
| Equity in net  loss of affiliates               |       | —   |       | (97      | )          |
|                                            |       |     |       |     |       |
| Consolidated income  before income taxes        |       | $        | 4,634      |     | $          | 5,150 |   |

 

**7.SUBSEQUENT EVENT — REVOLVING CREDIT FACILITY**

In May 2007, the Company entered into a $10 million unsecured creditagreement with a bank.  This revolvingcredit facility is available to finance working capital, issue letters ofcredit and finance general corporate purposes. The Company can obtain letters of credit in an aggregate amountof $5 million, which reduces the maximum amount available for borrowing underthe facility. Interest on amountsborrowed is payable at a base rate or a Eurodollar rate, in each case asdefined in the agreement.  The base rateis equal to the higher of the Federal Funds Rate plus 0.5% or the bank’s primerate.  Fees on outstanding letters ofcredit are either 1% (if the Company’s consolidated leverage ratio is less thanor equal to 1.25:1) or 1.25% (if the Company’s consolidated leverage ratio isgreater than 1.25:1) of face value per annum. The Company also pays a quarterlycommitment fee on the unused portion of the facility, which is either 0.1% (ifthe Company’s consolidated leverage ratio is less than or equal to 1.25:1) or0.15% (if the Company’s consolidated leverage ratio is greater than 1.25:1).

The terms of the agreement provide for customary representations andwarranties, affirmative and negative covenants, events of default, andlimitations on dividends, capital expenditures and acquisitions.  The Company also is required to maintaincompliance with the following financial covenants (in each case, as defined inthe agreement):

·                  Consolidated minimum annual EBITDA of atleast $12 million, computed quarterly on a rolling 12-month basis

·                  Consolidated tangible net worth of at least$36 million

·                  Consolidated maximum leverage ratio of 1.5:1

The credit agreementexpires in May 2009.  However, letters ofcredit may have an expiration date of up to one year beyond the expiration dateof the credit agreement.

The Company has aseparate credit agreement with another bank for the issuance of letters ofcredit.  The Company issues letters ofcredit as collateral for performance on certain of its outsourced governmentportal contracts, as collateral for certain performance bonds and as collateralfor certain office leases.  In total, theCompany and its subsidiaries had unused outstanding letters of credit ofapproximately $1.3 million at March 31, 2007. It is the Company’s intention to cancel these letters of credit upontheir expiration dates throughout 2007 and reissue them under the new revolvingcredit facility.

12

----

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

***FORWARD-LOOKING STATEMENTS***

# *“Safe Harbor” statement under the Private Securities Litigation ReformAct of 1995: Statements in this Quarterly Report on Form 10-Qregarding NIC and its business, which are not historical facts, are “forward-lookingstatements” that involve risks and uncertainties.   Certain matters discussed in this report mayconstitute forward-looking statements within the meaning of the federalsecurities laws that inherently include certain risks and uncertainties. Forexample, statements like we “expect,” we “believe,” we “plan,” we “intend” orwe “anticipate” are forward-looking statements. Investors should be awarethat our actual operating results and financial performance may differmaterially from our expressed expectations because of risks and uncertaintiesabout the future including those risks discussed in our 2006 Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 15,2007.  In addition, we will notnecessarily update the information in this Quarterly Report on Form 10-Qif any forward-looking statement later turns out to be inaccurate.Management continuously updates and revises these estimates and assumptionsbased on actual conditions experienced. However, it is not practicable to publish all revisions and, as aresult, no one should assume that results projected in or contemplated by theforward-looking statements will continue to be accurate in the future.*

**WHAT WE DO — AN EXECUTIVE SUMMARY**

We are a leading provider of eGovernment services thathelp governments use the Internet to reduce costs and provide a higher level ofservice to businesses and citizens. We accomplish this currently through twodivisions: our core portal outsourcing businesses and our software &services businesses.

In our core business, portal outsourcing, we enterinto contracts primarily with state governments and design, build and operateWeb-based portals on their behalf. We enter into long-term contracts,typically three to five years, and manage operations for each governmentpartner through separate subsidiaries that operate as decentralized businesseswith a high degree of autonomy. Our portals consist of Web sites andapplications that we build, which allow businesses and citizens to accessgovernment information online and complete transactions, including applying fora permit, retrieving driver’s license records or filing a form or report. Wehelp increase our government partners’ revenues by expanding the distributionof their information assets and increasing the number of financial transactionsconducted with governments.  We do thisby marketing portal services and soliciting users to complete government-basedtransactions and to enter into subscriber contracts that permit users to accessthe portal and the government information contained therein in exchange fortransactional and/or subscription user fees. We are typically responsible forfunding up-front investment and ongoing operational costs of the governmentportals.  Our unique self-fundingbusiness model allows us to reduce our government partners’ financial andtechnology risks and obtain revenues by sharing in the fees generated fromeGovernment services. Our clients benefit because they gain a centralized,customer-focused presence on the Internet. Businesses and citizens gain afaster, more convenient and more cost-effective means to interact withgovernments.

13

----

 

Onbehalf of our government partners, we enter into separate agreements withvarious agencies and divisions of the government to provide specific servicesand to conduct specific transactions. These agreements preliminarily establishthe pricing of the transaction and data access services we provide and thedivision of revenues between the Company and the government agency. Thegovernment must approve prices and revenue sharing agreements. We generally ownall the applications developed under these contracts. After completion of adefined contract term, the government agency typically receives a perpetual,royalty-free license to the applications for use only. If our contract were notrenewed after a defined term, the government agency would be entitled to takeover the portal in place with no future obligation of the Company. In somecases, we enter into contracts to provide consulting, development andmanagement services to government portals in exchange for an agreed-upon fee.

Currently,we have contracts to provide portal outsourcing services for nineteen states,eighteen of which operate under our self-funding business model (see Note 2 inthe Notes to Consolidated Financial Statements included in this Form10-Q).  Our closest competitors operateno more than one state portal each. We also provide portal outsourcing servicesto three local governments.

# **REVENUERECOGNITION**

We classify ourrevenues and cost of revenues into two categories: (1) portal and (2) software& services.  The portal categoryincludes revenues and cost of revenues primarily from our subsidiariesoperating government portals on an outsourced basis.  The software & services category includesrevenues and cost of revenues primarily from our UCC and corporate filings andethics & elections businesses.

#### *Our portal outsourcingbusinesses*

We categorize our portal revenues according to theunderlying source of revenue.  A briefdescription of each category follows:

·                  DMVtransaction-based: these are transaction fees from the sale of electronicaccess to driver history records, referred to as DMV records, from our stateportals to data resellers, insurance companies and other pre-authorizedcustomers on behalf of our state partners, and are generally recurring.

·                  Non-DMVtransaction-based: these are transaction fees from sources other than thesale of DMV records, for transactions conducted by business users and consumerusers through our portals, and are generally recurring.  For a representative listing of non-DMVservices we currently offer through our portals, refer to Part I, Item 1 in ourForm 10-K for the year ended December 31, 2006, filed with the SEC on March 15,2007.

·                  Softwaredevelopment & portal management: these are fees from the performance ofsoftware development projects and other time and materials or fixed feeservices for our government partners. While we actively market portal software development services, they donot have the same degree of predictability as our transaction-based revenues.

14

----

 

*Our software& services businesses*

# UCCand corporate filings

Our UCC and corporatefilings software development business derives the majority of its revenues fromfixed-price application development contracts and recognizes revenues onthe percentage of completion method.  AtMarch 31, 2007, this business was primarily engaged in servicing its contractwith the California Secretary of State and no longer markets its applicationsand services in respect of new engagements.

Ethics& elections

Our ethics & elections business derives themajority of its revenues from time and materials application development andmaintenance outsourcing contracts and recognizes revenues as services areprovided.  At March 31, 2007, our ethics& elections business was primarily engaged in servicing its contracts withthe Federal Election Commission and the state of Michigan.

**CRITICALACCOUNTING POLICIES**

Therehave been no material changes to our critical accounting policies and estimatesfrom the information provided in Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” included in our Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 15, 2007,except as follows:

*UncertainTax Positions*

Weaccount for uncertain tax positions in accordance with FASB Interpretation No.(“FIN”) 48, “Accounting forUncertainty in Income Taxes” — an interpretation of FASB Statement No. 109.”  The application of income tax law isinherently complex. Laws and regulations in this area are voluminous and areoften ambiguous. As such, we are required to make many subjective assumptionsand judgments regarding our income tax exposures.  Interpretations of and guidance surroundingincome tax laws and regulations change over time. As such, changes in oursubjective assumptions and judgments can materially affect amounts recognizedin the consolidated balance sheets and statements of income. See Notes 1 and 4in the Notes to Consolidated Financial Statements included in this Form 10-Qfor additional detail on our adoption of FIN 48 in the first quarter of 2007and our uncertain tax positions.

# **RESULTS OF OPERATIONS**

Thefollowing discussion summarizes the significant factors affecting operatingresults for the three-month periods ended March 31, 2007 and 2006.  This discussion and analysis should be readin conjunction with our consolidated interim financial statements and therelated notes included in this Form 10-Q.

15

----

| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Key Financial Metrics**                                     | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue growth —  outsourced portals                               |       | 17                                               | %          | 24 | % |
| Same state revenue  growth — outsourced portals                    |       | 16                                               | %          | 8 | % |
| Recurring portal  revenue %                                             |       | 93                                               | %          | 97 | % |
| Gross profit % —  outsourced portals                               |       | 47                                               | %          | 51 | % |
| Selling &  administrative expenses as % of portal revenues          |       | 26                                               | %          | 20 | % |
| Operating income margin % (operating income as a % of portal  revenues) |       | 20                                               | %          | 29 | % |
|                                                                         |            |                                                  |            |  |  |  |  |

 

PORTAL REVENUES. In the analysis below, we havecategorized our portal revenues according to the underlying source of revenue(in thousands) with the corresponding percentage change from the prior yearperiod.
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **%Change** | ** ** | **2006** | ** ** |
| DMV transaction-based                         |       | $                                                    | 11,460     |   | 3 | % | $ | 11,176 |   |
| Non-DMV  transaction-based                    |       | 6,015                                                |       | 14 | % | 5,263 |   |
| Software development  & portal management |       | 2,393                                                |       | 335 | % | 550 |   |
|                                          |       |                                                 |       |   |   |   |   |
| Total                                         |       | $                                                    | 19,868     |   | 17 | % | $ | 16,989 |   |

 

Portal revenues in the current quarter increased 17%, orapproximately $2.9 million, over the prior year quarter.  Of this increase, 16%, orapproximately $2.8 million, was attributable to an increase in same stateportal revenues (outsourced portals in operation and generating recurringrevenues for two full years), and 1%, or approximately $0.1 million, wasattributable to our new Vermont portal, which began generating DMV revenues inMarch 2007.

OurIndiana portal subsidiary signed a new long-term contract with the state ofIndiana that commenced on July 1, 2006. The new contract is based on a funding model that includes recurringfixed monthly fees for baseline services and primarily project-based pricingfor variable services.  Historically, themajority of revenues under this contract were DMV and non-DMVtransaction-based.  Under the newcontract, the majority of revenues are classified as software development &portal management.  Prior to July 1,2006, we defined same state revenues as those from states in operation andgenerating DMV revenues for two full years. Because the baseline revenues from the new Indiana contract are recurring,we have continued to include Indiana portal revenues in the calculation of samestate revenue growth even though we no longer earn DMV transaction-basedrevenues under the contract.  Same stateportal revenues in the current quarter increased 16% over the prior yearquarter due to increased transaction revenues from our Kentucky, Montana,Arkansas and Utah portals, among others.

ExcludingIndiana, same state portal revenues in the current quarter increased 19% overthe prior year quarter, with same state DMV transaction-based revenuesincreasing 10% and same state non-DMV transaction-based revenues increasing 38%(primarily due to the addition of several new revenue generating applicationsin existing portals).  Our same state revenue growth in the currentquarter was higher than the 8% growth we achieved in the prior 

16

----

year quarter primarily due to increases in same state DMV and non-DMVtransaction-based revenue growth. Excluding Indiana, same state DMV revenue growth in the current quarterwas 10% compared to 3% in the prior year quarter. The higher growth in thecurrent quarter was primarily due to the effect of modest DMV price increasesin three of our portal states that went into effect in late 2006.  Absent DMV price increases, same state DMVrevenues have historically grown at a rate of 1% to 3% per year.  Same state non-DMV transaction based revenuegrowth was 22% in the prior year quarter.

COST OF PORTAL REVENUES.  Cost of portal revenues for the currentquarter increased 26%, or approximately $2.2 million, over the prior yearquarter.  Of this increase, 25%, or approximately $2.1 million, wasattributable to an increase in same state cost of portal revenues, and 1%, orapproximately $0.1 million, was primarily attributable to our new Vermont portal.

The increase in same state cost of portal revenues inthe current quarter was partially attributable to additional personnel inseveral of our portals due to our continued growth and reinvestment in our corebusiness, coupled with mid-year 2006 non-executive salary increases across allportals that were in addition to normal annual increases, in an effort tobetter align our employee compensation structure with the general market.  Also contributing to this increase was anincrease in bank fees.  A growingpercentage of our non-DMV transaction-based revenues are generated from onlineapplications whereby users pay for information or transactions via creditcards.  We typically earn a percentage ofthe credit card transaction amount, but also must pay an associated fee to thebank that processes the credit card transaction.  We earn a lower gross profit percentage onthese transactions as compared to our other non-DMV applications.  However, we anticipate these revenues and theassociated bank fees will continue to increase in the future, as thesetransactions contribute favorably to our operating income growth.

Our portal gross profit rate in the current quarterwas 47% compared to 51% in the prior year quarter, with cost of portal revenuesgrowing at a higher rate (26%) than portal revenues (17%), as further discussedabove.  We carefully monitor our portalgross profit percentage in an effort to balance generating a solid financialreturn and delivering value to our government partners through reinvestment inour portals.  We expect our portal grossprofit percentage to range from 45% to 47% in 2007.

SOFTWARE & SERVICES REVENUES. In the analysisbelow, we have categorized our software & services revenues by type ofbusiness (in thousands), with the corresponding percentage change from theprior year period.       
| ** **                                        | ** ** | **Three-Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                        | ** ** | **%Change** | ** ** | **2006** | ** ** |
| UCC &  corporate filings software development |       | $                                               | 172        |   | 110 | % | $ | (1,781 | ) |
| Ethics &  elections                           |       | 528                                             |       | 17 |   | 452 |   |
| Other                                             |       | 66                                              |       | (25 | )% | 88 |   |
|                                              |       |                                            |       |   |   |   |   |
| Total                                             |       | $                                               | 766        |   | 162 | % | $ | (1,241 | ) |

 

17

----

Software & services revenues in the prior yearquarter primarily reflect a revenue adjustment under percentage ofcompletion accounting relating to our contract with the California Secretary ofState, as further discussed in Note 5 in the Notes to Consolidated FinancialStatements included in this Form 10-Q. We recognize revenue on our contract with the California Secretary ofState using the percentage of completion method as we make progress, utilizingcosts incurred to date as compared to the estimated total cost for thecontract.

COST OF SOFTWARE& SERVICES REVENUES.  Cost ofsoftware & services revenues in the prior year quarter primarily reflectsan expense adjustment under percentage of completion accounting relating to ourcontract with the California Secretary of State as further discussed in Note 5in the Notes to Consolidated Financial Statements included in this Form 10-Q.

SELLING & ADMINISTRATIVE.  Selling & administrative expensesin the current quarter increased 49%, or approximately $1.7 million, over theprior year quarter.  The increase inselling & administrative expenses was mostly attributable to additionalpersonnel across our corporate-level divisions, coupled with mid-year 2006non-executive salary increases across all corporate-level divisions that werein addition to normal annual increases, in an effort to better align ouremployee compensation structure with the general market.  Our corporate-level headcount has increasedby approximately 20% since the first quarter of 2006, as we have addedpersonnel to support and enhance corporate-wide information technology securityand portal operations, in addition to sales & marketing and growthinitiatives.  Finally, stock-basedcompensation included in selling & administrative expenses in the currentquarter increased by approximately $0.2 million over the prior year quarter duemainly to restricted stock awards that were granted to employees andnon-employee directors subsequent to the first quarter of 2006.  As a percentage of portal revenue, selling& administrative expenses were 26% in the current quarter compared to 20%in the prior year quarter.  We expect selling & administrativecosts as a percentage of portal revenue to be higher throughout 2007 as comparedto 2006, as we plan to spend an additional $4 million to $6 million (in addition to normal annual increases inselling & administrative costs) on business development, marketingand operations in an effort to accelerate new state portal contract wins andnon-DMV revenue growth.

INTERESTINCOME.  Interest income reflectsinterest earned on our investable cash and marketable securities portfolio. Asfurther discussed in Note 3 in the Notes to Consolidated Financial Statementsincluded in this Form 10-Q, on January 29, 2007, our Board of Directorsdeclared a special cash dividend of $0.75 per share, payable to shareholders ofrecord as of February 12, 2007.  Thedividend, totaling approximately $46.7 million, was paid on February 20, 2007out of our available cash and marketable securities.  As a result of this dividend, we expectinterest income to decrease significantly for the remainder of 2007, as ouraverage investable cash and marketable securities balance will be significantlylower in 2007 as compared to 2006.

INCOME TAXPROVISION.  Our effective tax rate wasapproximately 41% in the current quarter compared to 43% in the prior yearquarter.  Our income tax provision in theprior year quarter was higher than the amount customarily expected due primarilyto the establishment of a valuation allowance for a state income tax losscarryforward that we may be unable to 

18

----

fully utilize.  Prospectively, we expect our effective taxrate to be between 40% and 42%.

# **LIQUIDITY AND CAPITAL RESOURCES**

Ournegative operating cash flow in the current quarter, an atypical workingcapital timing situation that should reverse in the second quarter of 2007, wasprimarily due to a substantial build in accounts receivable and the timing ofpayments to certain of our government partners, which affected accountspayable.  We typically see an increase inboth accounts receivable and accounts payable in the first quarter of everyyear due to increases in revenues across our portal businesses as compared tothe fourth quarter of the previous year, which is our seasonally lowest quarterdue to the smaller number of business days and a lower volume ofbusiness-to-government and citizen-to-government transactions during theholiday periods.  While a generalincrease in revenues in the current quarter contributed to an increase in ouraccounts receivable, a substantial portion of the increase (approximately $3.0million) was attributable to a build in accounts receivable relating to our newIndiana portal contract.  As discussedabove, we signed a new contract with the state of Indiana that commenced onJuly 1, 2006.  The new contract is basedon a funding model that includes recurring fixed monthly fees for baselineservices and primarily project-based pricing for variable services.  As part of the transition process from theold contract to the new, we had not yet been paid at the end of the currentquarter for baseline and variable services performed since July 2006.  However, we received approximately $5.0million from the state of Indiana in April 2007, and prospectively, anticipatereceiving payments on a monthly basis under this contract.

Accountspayable at the end of 2006 were temporarily high due in part to an increase infourth quarter tax payment processing from tax filing applications across ourportal businesses, most notably in Hawaii. Such tax payments are frequently made via ACH or credit cards at the endof the year, whereby we do not receive payment or remit collected cash until afteryear end.  The majority of these year-endtax receipts were remitted to our government partners in early January 2007.

We had a history of unprofitable operations prior to2003 primarily due to operating losses incurred in our software & servicesbusinesses.  These losses generatedsignificant federal and state tax net operating losses, or NOLs.  As a result of our NOL carryforwards, we arenot currently paying federal income taxes, with the exception of minimalamounts relating to alternative minimum tax, and are only paying minimalamounts of state income taxes in certain states.  This positively impacts our operating cashflow and will continue to positively impact our operating cash flow during theNOL carryforward periods.  Based on ourcurrent projections, we expect to fully utilize our federal NOL carryforwardsby the end of 2009.  For the three-monthperiods ended March 31, 2007 and 2006, combined federal and state income taxpayments totaled approximately $0.3 million and $0.4 million, respectively.

We recognize revenue primarily from providingoutsourced government portal services net of the transaction fees due to thegovernment when the services are provided. The fees that we must remit to thegovernment are accrued as accounts payable and accounts receivable at the timeservices are provided. As a result, trade accounts payable and accountsreceivable reflect the gross amounts outstanding at the balance sheetdates.  Gross billings for 

19

----

the three months ended March 31, 2007 and December 31,2006 were approximately $241.3 million and $196.9 million, respectively.  The Company calculates days sales outstandingby dividing trade accounts receivable at the balance sheet date by grossbillings for the period and multiplying the resulting quotient by the number ofdays in that period.  Days salesoutstanding for the three-month periods ended March 31, 2007 and December 31,2006 was 14 and 13, respectively.

Webelieve that working capital is an important measure of our short-termliquidity.  Working capital, defined ascurrent assets minus current liabilities, decreased to $31.3 million at March31, 2007 from $73.0 million at December 31, 2006.  Our current ratio, defined as current assetsdivided by current liabilities, at March 31, 2007 was 1.8 compared to 2.8 atDecember 31, 2006.  The decrease in ourworking capital and current ratio was attributable to the $46.7 million specialdividend paid out of the Company’s available cash and marketable securities inthe current quarter as further discussed below and in Note 3 in the Notes toConsolidated Financial Statements included in this Form 10-Q.

Investing activities in the current quarter primarilyreflect the liquidation of our marketable securities portfolio to pay the $46.7million special cash dividend, and $1.0 million of capital expenditures, which were for normalfixed asset additions in our outsourced portal business, including Web servers,purchased software and office equipment. Cash used in investing activities in the prior year quarterprimarily reflects $5.0 million in purchases of marketable debt securities inan effort to increase the investment income from our excess cash reserves, and$0.8 million of capital expenditures, which were primarily for normal fixed assetadditions in our outsourced portal business.

Financing activities in the current quarter primarilyreflect payment of the $46.7 million special cash dividend, in addition to $0.5million in proceeds from the exercise of employee stock options and $0.2million in proceeds from our employee stock purchase program.  Financing activities in the prior yearquarter primarily reflect $0.3 million in proceeds from the exercise ofemployee stock options and $0.2 million in proceeds from our employee stockpurchase program.

At March 31, 2007,our total cash and marketable securities balance was $33.1 million compared to$81.8 million at December 31, 2006.  Asfurther discussed above, we paid a special cash dividend totaling $46.7 millionin the current quarter out of the Company’s available cash and marketablesecurities.  We do not believe thisdividend will have a significant effect on our future liquidity. We believethat our currently available liquid resources and cash generated fromoperations will be sufficient to meet our operating requirements, capitalexpenditure requirements and current growth initiatives for at least the nexttwelve months without the need of additional capital.  However, we may need to raise additionalcapital within the next twelve months to further:

·                  fundoperations if unforeseen costs arise, including the costs to fund our contractwith the California Secretary of State and subcontractors on that project;

·                  collateralizeletters of credit, which we are required to post as collateral for performanceon certain of our outsourced government 

20

----

portalcontracts, as collateral for certain performance bonds, and as collateral forcertain office leases;

·                  support ourexpansion into other states and government agencies beyond what is contemplatedif unforeseen opportunities arise;

·                  expand ourproduct and service offerings beyond what is contemplated if unforeseenopportunities arise;

·                  respond tounforeseen competitive pressures; and

·                  acquiretechnologies beyond what is contemplated.

Any projections of futureearnings and cash flows are subject to substantial uncertainty. If ouravailable cash, marketable securities and cash generated from operations areinsufficient to satisfy our liquidity requirements, we may seek to selladditional equity securities or issue debt securities.  The sale of additional equity securitiescould result in dilution to the Company’s shareholders.  There can be no assurance that financing willbe available in amounts or on terms acceptable to the Company, if at all.  Further, we may also draw on the unused portionof the $10 million unsecured line of credit we obtained in May 2007, as furtherdiscussed in Note 7 in the Notes to Consolidated Financial Statements includedin this Form 10-Q.

We issue letters of credit as collateral forperformance on certain of our outsourced government portal contracts, ascollateral for certain performance bonds and as collateral for certain officeleases.  These irrevocable letters ofcredit are generally in force for one year, for which we pay bank fees of approximately1.25% to 1.75% of face value per annum. We had unused outstanding letters of credit totaling approximately $1.3million at March 31, 2007 and December 31, 2006.  We are not currently required to cash collateralizethese letters of credit.  Our collateralrequirements have eased over time as we have continued to operate profitablyand grow our earnings.  However, eventhough we expect to be profitable in fiscal 2007 and beyond, we may not be ableto sustain or increase profitability on a quarterly or annual basis.  We will need to generate sufficient revenueswhile containing costs and operating expenses if we are to achieve sustainedprofitability.  If we are not able tosustain profitability, our cash collateral requirements may increase.  Had we been required to post 100% cash collateralat March 31, 2007 for the face value of all performance bonds (which arepartially supported by letters of credit) and our line of credit in conjunctionwith a corporate credit card agreement, unrestricted cash would have decreasedand restricted cash would have increased by approximately $3.3 million.

                AtMarch 31, 2007, we were bound by performance bond commitments totalingapproximately $2.3 million on certain government portal outsourcingcontracts.  These performance bonds arecollateralized by a $1 million letter of credit.  We have never had any defaults resulting indraws on performance bonds or letters of credit.

We do not haveoff-balance sheet arrangements or significant exposures to liabilities that arenot recorded or disclosed in our financial statements.  While we have significant operating leasecommitments for office 

21

----

space, those commitments are generally tied to theperiod of performance under related contracts.

**RECENT ACCOUNTING PRONOUNCEMENTS**

*Fair Value Measurements*

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  SFAS No. 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.  We will berequired to adopt this standard in the first quarter of 2008.  We are currently evaluating the requirementsof SFAS No. 157 and have not yet determined the impact, if any, on ourconsolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value.  Unrealized gains and losses onitems for which the fair value option has been elected are reported inearnings.  SFAS No. 159 does not affect any existing accounting literaturethat requires certain assets and liabilities to be carried at fair value. Wewill be required to adopt this standard in the first quarter of 2008.  We are currently evaluating the requirementsof SFAS No. 159 and have not yet determined the impact, if any, on ourconsolidated financial statements.

22

----

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

INTERESTRATE RISK.  Our exposure to market riskfor changes in interest rates relates to the increase or decrease in the amountof interest income we can earn on our short-term investments in marketable debtsecurities and cash balances.  Becauseour investments are in short-term, investment-grade, interest-bearingmarketable securities, we are exposed to minimal risk on the principal of thoseinvestments. We limit our exposure to credit loss by depositing our cash withhigh credit quality financial institutions. We enhance the safety and preservation of our invested principal fundsby attempting to limit default risk, market risk and investment risk. We do notuse derivative financial instruments. A 10% change in interest rates would nothave a material effect on our financial condition, results of operations orcash flows.

23

----

**ITEM4.  CONTROLS AND PROCEDURES**

**a)EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

TheCompany maintains a set of disclosure controls and procedures designed to ensurethat material information required to be disclosed in its filings under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Act is accumulated and communicated to the issuer’s management,including its principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure. Under the supervision and with the participationof our management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of the effectiveness of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)promulgated under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  Based on this evaluation, ourprincipal executive officer and our principal financial officer concluded thatour disclosure controls and procedures were effective as of the end of theperiod covered by this Quarterly Report on Form 10-Q.

**b)CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

# As of the end of the period covered by thisreport, our management, including our principal executive officer and principalfinancial officer, concluded that there have been no changes in our internalcontrol over financial reporting that occurred during our first fiscal quarterof 2007 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

24

----

**PART II.OTHER INFORMATION**

**ITEM6.  EXHIBITS**

9.2 – FirstAmendment dated December 15, 1999 to Voting Trust Agreement between Jeffery S.Fraser and Ross C. Hartley and certain Holders of Shares of NationalInformation Consortium, Inc. dated June 30, 1998

10.52 – CreditAgreement Dated as of May 2, 2007 between NIC Inc., as borrower, and Bank ofAmerica, N.A., as Lender and L/C Issuer

31.1 –Certification of Chairman of the Board and Chief Executive Officer Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

31.2 –Certification of Chief Financial Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

32.1 – Section 906Certifications of Chairman of the Board and Chief Executive Officer and ChiefFinancial Officer furnished in accordance with Securities Act Release 33-8212

25

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Company has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                     | NIC INC.                                                              |
|---------------------|-----------------------------------------------------------------------|
|                |                                                                  |
| Dated: May 7,  2007 | /s/Eric J. Bur                                                        |
|                | Eric J. Bur                                                           |
|                | Chief Financial Officer                                               |
|                |                                                                  |
| Dated: May 7,  2007 | /s/Stephen M. Kovzan                                                  |
|                | Stephen M. Kovzan                                                     |
|                | Vice President, Financial   Operations and Chief Accounting   Officer |

 

26

----